Global Ship Lease, Inc. (GSL) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Global Ship Lease Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Ian Webber, Chief Executive Officer of Global Ship Lease. Sir, you may begin.

Thank you very much. Good morning, everybody, and thank you for joining us. I hope you've been able to look at the earnings release that we issued earlier today, and been able to access the slides that accompany this call. As usual, slides 1 and 2 reminds you that today's call may include forward-looking statements that based -- that are based on current expectations and assumptions and are, by the nature, inherently uncertain and outside of the companies control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the Safe Harbor section of the slide presentation. We also draw your attention to the Risk Factors section around most recent annual report on Form 20-F, which is for 2016, and was filed with the SEC on April 12 of this year. You can obtain this via our website or via the SEC's. All of our statements qualified by these and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements. For reconciliations of the non-GAAP financial measures, to which we will refer during this call, to the most directly comparable measures calculated and presented in accordance with GAAP, you should refer to the earnings release that we issued this morning, which is also available on our website. For today's presentation, I'll begin as usual with an overview of our quarter, fleets, our charter portfolio and our strategy. After that, Tom will discuss the wider container shipping market and provide an overview of our financials. I'll then return for brief summary remarks, and we'll then be glad to take your questions. Turning to Slide 3. We've made significant progress since our last earnings call at the end of July. While the business continues to perform well, generating substantial cash, we've also made significant progress in ensuring long-term cash visibility -- cash flow visibility by extending our charter and enhancing balance sheet's strength and flexibility with the wholesale opportunistic refinancing, which we've just completed. Our fleet was fully chartered throughout the quarter, with 0 offhire, generating revenue of $41.2 million, adjusted EBITDA of $29.3 million and a net income of $8.9 million. On the time charter front, we recently agreed a new time charter with CMA CGM for our 8000 TEU vessel OOCL Tianjin, which is shortly to be renamed with GSL Tianjin. And we also extended the charters on 2 of our 2200 TEU vessels also with CMA CGM by 12 months, so that they now expire around September next year 2018. This expands our long-term working relationship with the containership market leader and major shareholder in GSL and ensures full-fleet employment on an EBITDA positive basis, throughout the slower winter season. We also successfully closed on our $360 million offering of new senior secured loans due 2022, that's in conjunction with the newly established secured term loan of $54.8 million, has enabled us to refinance all of our outstanding debts on improved terms. Those terms compared to both the previous 2019 notes, and the summer offering, which we suspended. We believe that this speaks to the strength of the GSL business model and also points to a clear and sustained strengthening of the underlying fundamentals from midsize and smaller containerships. Tom will come back to this point and some detail later in the presentation. On Slide 4, as usual, we illustrate the company's strong and stable results throughout the market cycle, in contrast to the more volatile stock markets. As you can see in the line at the top of the slide, the charter market has strengthened in recent months after a sustained low for most of the last several years. While seasonal factors have recently slowed, some of that up with momentum, we remain confident that the longer-term fundamentals for midsize and smaller vessels, that is limited vessel ordering in these size segments, positive scrapping activity and robust demand growth in trade lanes dependent on this tonnage. That these fundamentals which have driven the market recovery for midsize and smaller vessels remain firmly intact, exerting upward pressure and freight rates -- upward pressure on charter rates and asset values overtime. With continued full fleet employment, secured and tight control of costs, and a high record -- a record of high utilization, we are well-positioned to continue generating stable results leading forward. Slide 5 shows more detail on our 18 vessel charter portfolio. As of September 30, 2017, we had a weighted average remaining contract duration of 3.3 years, and approximately $518 million of contracted revenue, adjusted for the new charter on Tianjin. The strength of our chartered portfolio is evidenced, not only by significant contracted cash flows, but also by the mix of vessel sizes and capabilities and the staggered exploration of the contracts, which ensures risk diversification throughout the cycle. You can see indicated in green, the recent extensions for 2200 TEU Delmas Keta and Julie Delmas, as well as the newly agreed charter for Tianjin, all with CMA CGM, which together ensure full charter cover on an EBITDA positive basis throughout the winter season. In each of these cases, we were able to continue the vessels employment without incurring any downtime or repositioning costs, which is particularly noteworthy in the context of the Tianjin, where we change charterers and we work closely with both OOCL and with CMA CGM to coordinate timing in such a way as to ensure a truly seamless handover of the ship. As you can see, the majority of our fleet continues to operate on a long-term basis with a weighted average contract cover across the fleets of 3.3 years. At Slide 5, the one we've just been looking at, that's a cash flow to be derived essentially from our charter backlog. Slide 6, which is new to our quarterly call deck, but which we used on our refinancing roadshow, looks at the GSL fleet values on the various metrics and shows how debt develops with the contractual deleveraging built into the new notes and new secured term loan. To this point, we've committed to $40 million of amortization in each of the first 3 years and $35 million annually thereafter. The blue bar for the notes and the orange bar for the term loan, shows -- show the effect of this amortization. The term loan is fully repaid by the end of year 3, and maturity in 2022, some $225 million principal amount of notes remain outstanding. Cash is ignored in this slide, so these are gross debt measures. We also show our fleet values as of mid-September, this year in the first column. The estimated scrap value of the fleet is in red, and is $151 million. The broker assessed charter free value in gray is $263 million, which incidentally is up 13% on the equivalent value in June, just 3 months previously, which demonstrates how the market has improved. The charter of cash valuation in green is $481 million, approximately the same as the June equivalent, despite having eaten through 3 months of charter cover. More important, perhaps, are the black and purple lines, which kind of run across the pages, sloping downwards. These provide evaluation benchmarks to demonstrate the potential for further uplift in asset values, as the industry comes back to a more supply demand balance. Tom will talk more about the underlying fundamentals, but the black line shows an implied age adjusted value for the fleet, if there were to be a revision to the 10-year historic average charter free values of each of our vessels. The reference period is from 2007 through 2016, which captures mainly the downcycle, so it's not at all 40. So where our 13.8-year old fleet, as it will be in a year's time, to revert to these 10-year historic average age adjusted values, it would be worth $441 million, charter free. The purple line shows new building price parity, it would cost around $800 million to build the GSL fleet, today, cyclically low new build prices. We then depreciate this number to the same average 13.8 years old, with the resulting number of being $445 million. Remarkably, similar to the implied 10-year historic average charter free value. And both of these are up some 70% from today's broker assessed charter free value of $263 million. There are a couple of important takeaways from this. First, there is considerable potential upside to asset values, as charter free values migrate towards these lines. And second, a little incentive for anybody to order new ships of this asset size, given the opportunity to purchase the equivalent vessels in today's market at a 70% discount. This combines with the lack of capital for investment, in particular, speculative orders, will, we believe continue to keep downward pressure on the order book. Moving to Slide 7, I'll give a brief update on our main counter party CMA CGM, which is the charter of our now 16 of our 18 vessels, and continues to be our largest shareholder. They continue to outperform the wider industry and have consistently fulfilled all charter obligations throughout our history, which includes, the most severe and extended downturn that we have ever experienced. As you can see on the left side of the chart, CMA CGM operates the third-largest container fleet in the world, and owned within that charters in, over 75% by number of vessels. We represents 16 of that 75%, 16 vessels out of the 75%. They've recently been in the market, raising additional debt capital and have been upgraded at the corporate level by both Standard & Poor's to B+ stable and by Moody's now B1 positive outlook. In addition to agreeing the charter extensions and the new charter with Tianjin with CMA CGM, we've recently welcome to our board [indiscernible], a senior finance executive at CMA CGM's head office, as further reinforcing the relationship between the 2 companies. On Slide 8, we have outlined our strategy for maximizing long-term shareholder value, which will be familiar to you. We remain committed to delivering strong cash flows through our quality fleet of 18 midsize and smaller containerships and to developing contracts and counterparties that provide us with the long-term stability and visibility. In line with these priorities, we will not produce speculative vessel acquisitions, but rather emphasize prudent and selective growth, that will enable us to capitalize on cyclically low asset values, whilst also secure immediate charter cover with the quality counterparty. We also remain focused on maintaining balance sheet strength and flexibility and we took a meaningful step forward in that regard with our recent financing giving us improved terms and extending the maturity of our principal element of debt-finance to late 2022, 5 years after from now. Overall, we're excited about the company's prospects as we head into an increasingly attractive market environment, which Tom will now discuss in greater detail.

Thanks, Ian. Over the next few slides, there'll be some recurring themes and these are summarized at the top of slide 9. Vis-a-vis that one, after a long challenging period, the industry is recovering from cyclical lows with demand growth now outpacing that to supply. Two, the order book has been rightsizing overtime as the industry adjusts to a combination of capital constraints and a new demand growth paradigm of single-digit, rather than double-digit growth. Three, improving supply demand fundamentals are supporting earnings in the spot charter market, and four, and this is the very heart of the GSL value proposition. We believe industry dynamics are most attractive from midsize and smaller ships, which makeup the GSL fleet and represent our focus to growth going forward. As we see it, these segments are said to be supply constrained, while also being called to most trade lanes. The chart at the base of this slide, underlying the points I've just made. On the left, you can see the interplay between demand growth, the dark blue bars and supply growth, the pale blue bars. The jagged red line cutting through the chart is the spot market charter rate index, a parameter of health for the sector. You can see demand growth beginning to overhaul supply growth in 2016, a trend which is accelerated into 2017. And charter rates, the red line, have responded positively accordingly, as long standing oversupply begins to swing back into balance. The right-hand chart shows how the global fleet has evolved since 2007. Most significantly, you can see how the order book-to-fleet ratio, which was noted for 60% in 2007, on the back of speculative orders, largely out of the German KG market, has fallen to 13.5% at the end of September. If you drill down further, as we will on our later slide, the order book-to-fleet ratio for sub 10,000 TEU ships, the midsize and smaller vessel segments, is only 3.1%. Slide 10, focuses mainly on demand-side fundamentals, [indiscernible] chart at top left shows the composition of global containerized trade in 2016, almost 30% of volumes were carried in the mainland trades, by which I mean Asia, Europe, the Transpacific, and Transatlantic. All relevant to us, however, is the fact that in aggregates, a little over 70% of global containerized trade volumes were carried on the non-main lane, intermediate and interregional trades, of which the largest is Intra-Asia. As we should demonstrate later, these are the trades served primarily by midsize and smaller ships. They're also the trades that have tended to show a robust growth. Slide 11, looks at the supply side fundamentals and illustrates the dynamics to continue to improve the midsize and smaller vessel segments. Top left, you can see that idle fleet capacity is trending down, at its worst, back in 2009, the idle fleet peaked at around 11%. By the end of September, this year, it was down to 1.9%, less than a third of the level of 12 months previously. The chart at top right, partly explains this reduction in idle capacity. In a word, scrapping. 2016 was a record year, with over 650,000 TEU going to the Breakers. 2017 has been slower on this scrapping front, which you would expect with the improving seen in the charter market. But about 340,000 TEU of capacity have still been scrapped out during the first 9 months of this year. And 100% of scrapping activity has been of midsize and smaller tonnage, which among other things is a function of distress in the German KG environment. Bottom left is a chart showing the order book. Significant for the big ships, and very small for the midsize and smaller vessel segments. So to reiterate the overall order book-to-fleet ratio of September 30, 2017, was 13.5% for vessels below 10,000 TEU, it was 3.1%. So existing capacity for midsize and smaller tonnage has been reduced by scrapping and the order book pipeline for replacement tonnage is limited. The results, as you can see from the chart at bottom right, is the net fleet growth in the first 9 months of 2017 is negative for a number of these segments, continuing at 2016 trend. In our view, this suggests the making of a supply size squeeze for midsize and smaller tonnage Slide 12, looks at vessel deployment patterns. The larger of the 2 charts, chops global containerized trade into 20 or so trade groupings, which arranged along the horizontal axis. Immediately, below these you'll see the number of vessels operated in each trade grouping. The largest number of vessels by quite some margin, almost 1600 units out of a total global fleet a little over 5000, is concentrated on the Intra-Asia trade and we'll come back to that in a moment. The bars on the chart showed the maximum vessel size deployed by trade grouping, the pale blue bars, and the average vessel size, the dark blue bars. Clearly, the really big ships are key to a handful of trades, driven by constant search for unit cost efficiency, driven by relatively high volumes, decent quantum infrastructure and long-haul trades. Asia, Europe is the most obvious example, served by the largest ships on the water today, a maximum size of roughly 22,000 TEU and an average size of roughly 14,000 TEU. On the flipside, midsize and smaller ships are caught on most other trade lands, returning to a larger single trade grouping, Intra-Asia, the breakout chart on the right shows that this trade has served exclusively by midsize and smaller vessels with over 75% by vessel number being of 2000 TEU or smaller. Slides 13 and 14, make the same point to Slide 11 but more graphically. Slide 13, shows the failings of the big ships, over 10,000 TEU, during a 30-day period in the third quarter. As you can see that primarily employed on the big East-West arterial trades. Contrast this to Slide 14, where you can see the deployment of midsize and smaller vessels during the same period, they are everywhere, which underlines their commercial utility and operational flexibility. Slide 15 and 16 are really the punchline for this market section. Slide 15 underpins our fees for the sector, is it a positive inflection point, especially for midsize and smaller tonnage. Container market fundamentals are improving, with idle capacity down, and demand growth outpacing supply growth. Spot market charter rates our leading indicators are up by almost 40% albeit from a very low base on this time last year. Asset values have followed suit, and are up by over 20% on last September and by over 30% on the lows of the fourth quarter of 2016. Nevertheless, as you can see from the chart on the right, or on actually the left, they remain close to long-term cyclical lows, suggesting a favorable risk reward backdrop for selective acquisitions. Slide 16, reemphasizes this last point, demonstrating the degree to which purchased opportunities and trading volumes of containerships have picked up, over the course of last year or so. 3.4x the number of trading containerships changed hands during the third quarter of 2017 versus the third quarter of 2016. Including a significant number of small and midsized containerships. And many of the sales are still flowing out of the distressed German KG environment. So to wrap up the market section, although the sector will remain both cyclical and seasonal, we see the foundations for recovery and the selective and highly disciplined growth with midsized and smaller vessels are especially attractive, given their tighter supply, flexible deployment, and commercial relevance to most trade lands. So let's move on now to the third quarter financials, starting on Slide 18. We generated revenue of $41.2 million, during the third quarter, the same as in the comparative 2016 period. With the small reduction in revenue as a consequence of the lower for longer amendments of the charters from retail Maersk and Kumasi, offset by fewer of high days in the quarter compared to the period -- the prior period. In the third quarter 2017, there was 0 offhire, giving us a 100% uptime for utilization. Vessel operating expenses. Vessel operating expenses were $10.6 million in the second quarter, down 10.2% from the prior year period, forgive me that should read in the third quarter. Importantly, the average operating cost per ownership day fell $702 to $6,401 per day. Interest expense, interest expense in the quarter was $10.4 million, down $0.7 million on the interest in the comparative 2016 period, primarily due to reduced interest on our loans, on lower amounts outstanding. Net income. Net income for the third quarter was $8.9 million, as compared to a loss of $23.7 million in the third quarter of 2016, which resulted from a noncash impairment charge of $29.4 million. The balance sheet. Slide 19 shows the balance sheet, however, given the recent refinancing, I'll draw your attention to only cash of $65.6 million and shareholder's equity of $351.4 million. Cash flows. Next, slide 20 shows our cash flows. I'd highlight that net cash provided by operating activities was $10.5 million in the third quarter, as compared to $8.9 million in the same period last year. I'll now turn the call back to Ian for closing remarks.

Thank you, Tom. We've been very busy, we've extended our full fleet employment with top tier counterparties and we've continued to generate stable predictable cash flows and earnings. We've got contracted revenue of $518 million, on a weighted average remaining contract term of 3.3 years. We've continued to maintain high vessel utilization and close control of costs. Since July, we've secured 2 charter extensions, each 12 months and a new charter for the Tianjin or with CMA CGM, and all of which are on an EBITDA positive basis. This ensures that we do not have any vessels coming open during the seasonally weaker winter months and gives us the ability to reenter the market, as a more attractive time in the spring. The market fundamentals for midsize and smaller containerships continue to improve, by creating upward pressure on charter rates and asset values, albeit with some seasonal volatility. We successfully refinanced all of our debt, which we said to be a strategic objective for this current year, through a combination of $360 million of new senior secured notes and $54.8 million of new senior secured term loan provided by Citigroup. The improved terms of our borrowings and particularly achieved on the notes, demonstrate a recognition of the fundamentals strengthening of the market for midsized and smaller containerships. The bank debt brings down the blended cost of debt, whilst also demonstrating continued support from Citi, one of the lenders still active in the sector. With this long-term stability and balance sheet strength now secured, and particularly, given the improving market conditions, we believe that GSL is in an excellent position to create value for its shareholders. And with that, we would now be happy to take any questions that you might have.

[Operator Instructions]. Our first question comes from Peter Levinson with B. Riley.

I guess my question is, if the future is as bright as you say, do you -- if it's safe to assume that will be seeing some insider purchases of stock in the near future, coupled with that, if 0 sell side analyst covering, is it time to re-think the outsourced IR approach?

Goodness. I can't comment on the inside purchases, I could only speak for myself, I can't speak for others and I'm not sure this is the right forum to comment on my appetite for GSL, stock or not. In terms of the sell side coverage, I think in common with other companies in the sector, we have lost analyst coverage, the banks have been retentioning and rethinking, how they look at the whole Marathon sector. And we would hope that having got our refinancing out of the way, that we will create more coverage on the debt side and on the equity side. And we keep in contact with the sell side analysts at all other major banks.

Our next question comes from Joel Ojdana with BAM.

I was just wondering, if you could give me a little bit more color on the daily vessel operating costs for the ships with charter expiring during 2018? So that would be, I guess, the trimmed by the Delmas ships to see a little bit more clarification on what the cost to run each day?

Sure. The average costs year-to-date is around $6400 per day. Now that's come down considerably on prior years, only in 2014, the average operating cost was $7,800 per day. The range across the fleet is not as great as you might think. It doesn't cost twice as much to run a 10,000 TEU vessels as a 5,000 TEU vessels, I said the range is maybe, sort of 5750 through to 7250. So I would use the higher number for the larger ships.

I'm sorry, could you repeat the bottom end of that range?

5750, roughly.

Okay. And roughly, right now, in the spot market for those roughly 2,200 TEU ships, what kind of daily rates are you saying?

Well, we fixed, we renewed our charters earlier last month, actually 2 months ago now, because we're in November, at $7,800 per day, I think that's a reasonable indication of market rates.

You think [indiscernible] currently?

So what I would add to what Ian just said is that the $7,800 a day is up from roughly $6,000 to $6,500 a day, which is where rates were for this type of vessels, this time last year, to give you a sense of the trajectory of rate movement.

Our next question comes from Howard Blum with UBS Financial.

With the refinancing, there were some pay-down requirements, as you have outlined in the different portions of your debt over the next few years, but your cash flow is obviously, well in excess of that. You've stated that you're looking to be opportunistic about acquiring new ships to bring down the average age of the fleet. If you're not able to do that on terms that you think are attractive, would the company consider reinstating a dividend? And are there any restrictions about dividends in the new indenture?

We're focused on developing the business and growing our portfolio ships, in the same way that we did after we refinanced in 2014, when we replaced restricted bank debt with more flexible high yields. That gave us the opportunity of investing resources and growing the fleet, we added the 3 OOCL vessels, that increased our EBITDA run rate by about 1/3 and that put us in a position to be able to pay the dividend, which we did at the end of 2015. This refinancing, we see in a similar way, it creates 5 years of runway before new debt maturity. We are committed to delivering along the way, and we do have our resources to invest in growing the business and that will be our near-term focus. So near term, we would be looking at investment opportunities and as Tom outlined, we believe that such opportunities do exist in the market. If we are, completely hypothetically, unable in a reasonable timeframe to grow the business, then we would look at the other central uses of cash, which would be proactive delivering, and or -- returning cash to equity. But they are controls over that [indiscernible] second part of your question. The terms of the secured notes precludes us from our contemplating a dividend on the common until 2021. And we are very comfortable with that because a near-term we want to focus our resources on growing the business as we've described.

[Operator Instructions]. Our next question comes from Dillion [indiscernible] with Cantor Fitzgerald.

Regarding your working capital, it seems that the main valuation are coming from the good expenses, which are lower in the third quarter and are growing again, at the end of the fourth quarter. Could you just tell us what is your good expenses? And is this pattern going to be repeated every year? How it move quarter-over-quarter, if there is a pattern?

The main complainant of that is accrued interest. The interest on our existing notes for 2019 maturity is payable on March 31 and September 31, and on new notes, its payable in mid-April and mid-November. So there are a couple of quarters, where we're building up a big liability for interest and then it suddenly collapses to 0, as we pay it down.

So when were the [indiscernible] due on the previous bonds and loans?

March 31 and September 30.

I'm showing no further questions. I would now like to turn the call back Mr. Ian Webber for any further remarks.

Thank you very much. And thanks for your questions and your time and we look forward to giving you a further update on the business after Q4, so in 2018. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.